Trade and Competition Policy — A Canadian Policy
*The following article was distributed at the 2012 Annual Conference of the International Bar Association held in Dublin, Ireland.
Evolution of the Interaction Between Trade and Competition Policy
In recent years, the number of bilateral and regional free trade agreements has significantly increased, with virtually all countries being a party to at least one, if not many. The substantial increase of international mergers and prospects for cross-border anti-competitive activities has led to a vibrant discussion on the importance of interaction between competition and trade policy. The work undertaken by a number of international organizations such as the Organization for Economic Cooperation and Development (OECD), the International Competition Network (ICN), the United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization (WTO), has played a major role in demonstrating the importance of competition policy in ensuring that the benefits of trade agreements are not undermined by anti-competitive practices.
Notwithstanding the efforts of the OECD and the ICN to internationalize competition law through the development of a number a tools to promote soft convergence in analytical enforcement techniques, disparities remain in the substantive competition policy standards and enforcement processes of international trading nations. In addition, in some cases, without cooperation among jurisdictions, the global effect of private parties’ anticompetitive activities can lead to difficulties in cross-border enforcement actions undertaken by competition agencies. In an attempt to alleviate these concerns, an increasing number of jurisdictions have implemented specific obligations within bilateral and regional trade agreements, requiring parties to maintain competition laws and to cooperate in their enforcement actions.
Even though the adoption of competition and trade policy can be mutually beneficial and forge deeper economic relations, they often remain distinct and may at times even conflict. Indeed, while trade law and policy belongs primarily to the international sphere; competition law and policy remain predominantly domestic, which can raise issues when they are ineffective or ineffectively enforced.
While significant progress has been made through increased cooperation among jurisdictions, the inclusion of competition-related provisions in bilateral and regional trade agreements has not resolved all cross-border enforcement issues. In order to harmonize competition policy at the global level, attempts have been made to establish a multilateral regime within the WTO framework. Indeed, it had been suggested that the establishment of a multilateral regime could lead to significant gains in the implementation of strong domestic competition laws in developing and emerging nations. Nevertheless, owing mostly to the significant divergence between the needs of developed and developing nations, the success of implementing binding competition rules on a multilateral basis has been limited thus far, and nations have understandably resorted to domestic competition law and policy to prevent anti-competitive practices by private actors.
Yet, while strong enforcement of domestic competition law and policy has led to a diminution of anticompetitive behaviour and significant efforts have been made amongst nations to integrate competition policy within trade agreements, many enforcement issues remain. Amongst them,
- the remaining disparities in competition policies and enforcement processes;
- the difficulties associated with the extraterritorial application of competition laws;
- the hurdles faced by competition agencies in accessing relevant information; and
- the exemption of most competition-related provisions from the dispute settlement process of existing trade agreements.
Therefore, and in order to keep pace with the increased trade liberalisation and integration of the global economy, the question as to whether a multilateral agreement on competition policy should be integrated under the WTO framework it still the subject of important debate.
Brief History of the Internalization of Competition Policy
International cooperation in competition-related matters was first contemplated in the Havana Charter for the proposed International Trade Organisation (ITO) in the mid-1940s. The Havana Charter proposed an entire chapter on restrictive business practices, which would have required the members to control global anticompetitive practices from both public and private actors. In addition, it was suggested that the ITO should be authorized to investigate any complaints that could not be resolved through consultation, and further to its investigation, provide recommendations for action.
The plans for the ITO were abandoned, and the General Agreement on Tariffs and Trade (GATT) introduced the first multilateral competition-related provisions. However, their scope was much more limited to the model contemplated under the Havana Chapter.
In 1958, a group of experts was mandated to study the feasibility of including trade related competition provisions in the GATT framework. In answer to the group’s report, a Decision on Arrangements for Consultations on Restrictive Business Practices1 was adopted in 1960, which recognized that that the activities of international cartels are harmful and may prevent the expansion of world trade, therefore impeding the benefits provided by trade agreements.
In 1980, the United Nations adopted the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices2 (the “UN Set”). The UN Set includes non-binding recommendations providing that nations should ensure that restrictive business practices do not impede or negate the realization of benefits that should arise from the liberalisation of tariff and non tariff barriers affecting international trade, and requires countries to take action in a mutually reinforcing manner at the national, regional and international levels to eliminate or effectively deal with anticompetitive practices affecting international trade.
In 1995, the GATT was superseded by the WTO and other agreements were added under the same framework.
The Existing WTO Framework
While the WTO has significantly contributed to reduce trade barriers implemented by governments, anticompetitive activities committed by private actors continue to give rise to serious concerns. In order to contribute to the removal of trade distortion created by private barriers to trade, the question was raised as to whether the WTO should implement an agreement on competition policy.
Between 1996 and 2004, numerous proposals were advanced by public and private actors; most of which proposed to bring competition law into the WTO framework. Many jurisdictions and observers favoured the binding rules of the WTO as opposed to the more lenient setting proposed under the UN Set. Indeed, under the WTO framework, anticompetitive practices from private actors could potentially be nullified, and eventual disputes could be subject to the existing dispute settlement mechanism.
As a result of the work undertaken by the Working Group on the interaction between Trade and Competition Policy, competition issues were included in the 2001 Doha Declaration, with the objective of clarifying the core principles of competition policy,3 and work on proposals for provisions on hard-core cartels, modalities for voluntary cooperation, technical assistance and capacity building.
As negotiations progressed, a number of concerns were raised on the proposed scope of the competition policy framework; therefore no consensus could be reached and, in 2003, competition policy was removed from the Doha Round’s agenda. More specifically, the opinion of developed and developing countries diverged on the inclusion of core principles in the competition policy framework. In addition, questions were raised on the scope of hard core cartels, mainly with respect to definitions, exemptions and potential sanctions. As for modalities of voluntary cooperation, technical assistance and capacity building, members were generally supportive of the implementation of a multilateral framework on voluntary cooperation, while opinions strongly diverged on the issues of harmonisation and integration, owing to the diversity of domestic competition laws among the developed economies and to the fact that, at the time, many developing country members did not have competition laws in place. A number of jurisdictions, including the United States (U.S.), also argued that other options, such as domestic laws and bilateral and regional agreements, could better address trade concerns arising from competition-related matters.
In Canada, in 2001 the Competition Bureau suggested closer multilateral cooperation on competition policy, and proposed to negotiate an agreement based on existing WTO agreements such as the Agreement on Trade-Related Aspects of Intellectual Property Rights4 (“TRIPS”) and the Agreement on Trade Related Investment Measures5 (“TRIMS”). The proposed model provided for minimum requirements that member states would agree to incorporate in their domestic competition law.6
In addition to the proposal put forward in the Doha Declaration, the Canadian model included other elements including the obligation to establish an independent competition authority; safeguards to protect confidential information; an obligation to adopt common substantive approaches on cartels, abuse of dominant position and pre-merger notifications; and a proposal to implement a dispute settlement mechanism.
Enforcement and Effectiveness of Competition Provisions in Trade Agreements
As mentioned above, the decision of the WTO member states not to proceed with negotiations on competition-related issues resulted in an intensification of bilateral and regional negotiations of trade agreements. There is limited information on the enforcement and effectiveness of competition provisions included in trade agreements. The use of competition-related provisions is usually not made public by the parties to such agreements; and it is thus difficult to evaluate the impact of such provisions. Nevertheless, given that most trade agreements include soft obligations on the issue of competition and do not specify what substantive competition rules should be, they have provided for relatively weak results.
Competition-related Provisions in Bilateral and Regional Trade Agreements
The competition-related provisions contained in trade agreements vary significantly. These provisions can generally be divided in two categories: (i) provisions that provide for the harmonization of competition regimes of the parties, and (ii) provisions related to cooperation and assistance on competition issues. Indeed, while some agreements provide for the harmonization of the competition regimes of the parties to different levels, other focus exclusively on cooperation and assistance on competition issues.
Even though some agreements provide for detailed commitments regarding the integration or harmonization of their competition laws, most provisions concerning the adoption and enforcement of domestic competition laws do not impose binding obligations, and only require the parties to adopt and enforce competition laws, irrespective of whether their laws are similar or not. While these provisions do not provide for integration, in the absence of a multilateral agreement on competition policy, the inclusion of such provisions in trade agreements has helped to create the basis for a global competition framework.
While certain jurisdictions have included detailed provisions on cooperation and coordination between competition authorities, many trade agreements only provide for exchange of non-confidential information on competition-related matters between the parties. However, a number of competition authorities have negotiated cooperation agreements with their counterparts, which sometimes provide for more robust commitments regarding cooperation and exchange of information. While information on the effectiveness of such provisions is limited owing to the confidential nature of investigations, the fact that these cooperation agreements do not allow the parties to appeal decisions of a competition authority not to cooperate on competition-related matters raises doubts with respect to the overall effectiveness of such agreements.
Moreover, even though a dispute settlement mechanism is generally included in trade agreements, competition related provisions are generally excluded from its application. While it has been proposed that dispute settlement procedures could be used to promote transparency and procedural fairness by determining if member countries are complying with their obligations to implement and maintain competition laws, most jurisdictions are reluctant to allow such mechanisms to review decisions of competition authorities in individual cases, or force competition authorities to investigate about potential anticompetitive activities.
Owing to their limited scope, the effectiveness and implementation of competition-related provisions in trade agreements face many challenges. As indicated above, competition provisions are usually non-binding, which sometimes lead to cross-border enforcement difficulties. For example, while certain agreements have put cooperation mechanisms in place, there is usually no legal sanction when parties refuse to cooperate on competition related-matters, and domestic statutory confidentiality protections may limit the circumstances in which competition agencies can cooperate. In addition, although advocating for competition laws which favour open markets and free competition, trade agreements do not provide tools for trading partners to impose compliance with such principles, and generally do not address substantive standards and enforcement processes.
A Global Framework on Competition Policy
Although international organizations and individual jurisdictions have undertaken significant efforts in promoting greater internationalization and cooperation on competition issues, the recent increase of multilateral negotiations on competition-related matters implies that there remains interest in exploring the option of negotiating a global framework agreement on competition policy. Indeed, the Agreement on the European Economic Area (EEA), the Common Market for Eastern and Southern Africa (COMESA) Competition Regulations, and the Mercado Común del Sur (MERCOSUR) have already agreed on a common and integrated approach to competition policy; other nations, including the members of the Trans-Pacific Partnership, have begun multilateral discussions which could eventually lead to greater integration among the members’ economies, including on competition-related matters. While these agreements are sometimes constrained in scope by national sovereignty considerations and have provided for limited success in enforcement cooperation, they imply a desire to promote predictable competition policy regime that will protect investors doing business abroad from anti-competitive practices in local markets. However, in 2005, a study by the United Nations Conference on Trade and Development (“UNCTAD”) argued that, owing to the knock-on effects of regional trade agreements of propagating competition laws in developing countries and the accompanying capacity building that many regional trade agreements entail, developing countries benefit from concluding regional trade agreements with competition provisions.7
Although reaching a global agreement on competition policy may not be achievable in the short term, recent initiatives undertaken at the regional level are advancing the internationalization of competition policy, and could set the stage for an eventual consensus on a fully elaborated multilateral agreement that could address the issues of shared principles, common substantive approaches, cooperation mechanisms and adequate instruments to resolve disputes.
Collapse of the WTO Doha Round
Although the Doha Round did not succeed in bringing an agreement on competition policy under the WTO’s umbrella, other WTO agreements include some competition-related provisions. These provisions are mostly included in the GATT, the General Agreement on Trade in Services8 (“GATS”) and the TRIPS.
The WTO framework focuses on government-created barriers to trade and investment. WTO commitments to liberalization are generally seen as promoting competition in domestic markets, by facilitating the entry of foreign players through the reduction or elimination of trade barriers such as tariffs and quotas, or other government-imposed restrictions, including restrictive regulations. Therefore, the existing framework does not address anticompetitive practices implemented by private actors.
The GATT and the GATS include provisions dealing with monopolies and national treatment, which require equal treatment between domestic and foreign firms. In addition, under certain circumstances, Article XVIII of the GATT allows its member states to rely on its rules and challenge measures that nullify or impair the benefits of trade liberalization, even if such measures are not in violation of GATT.
The TRIPS agreement prevents abuse of intellectual property rights which have a negative effect on competition, and allows competition authorities of the member states to control certain licensing agreements in case of an abuse of intellectual property rights having an adverse effect on competition in the relevant market.
Other broad competition-related principles are found in the Anti-dumping Agreement,9 the Technical Barriers to Trade Agreement,10 and the GATS Annex on Telecommunications.11
Although these WTO agreements include competition-related provisions that may have possible application in case of anticompetitive practices, such provisions remain limited in scope and, to date, have not led to any credible enforcement action.
The Kodak-Fuji case,12 brought by the U.S. against Japan, is an example of the limited scope of the competition-related provisions found in the existing WTO framework. In 1998 the US lost its trade dispute in a case which involved Kodak, Fuji and their respective governments, the US and Japan. Kodak alleged that Japan's photographic market and distribution structure was anticompetitive, as it was denying Kodak’s fair and equitable market opportunities. Kodak was essentially arguing that it could not penetrate the Japanese market beyond a certain level, owing to structural restraints, government intervention, and back-room policies that favoured Fuji. Fuji and the Japanese government argued that Kodak's poor results in its attempt to enter its market were due to deficient marketing, management, and investment in the Japanese market. The U.S. relied on Article XVIII of the GATT in its attempt to subject the dispute to the WTO dispute settlement mechanism. While the WTO report on the matter concluded that there was no impairment of market access, it noted that in order to be subject to the dispute settlement mechanism provided under the WTO framework, conduct impeding competition must result from governmental measures, as opposed to private business entities, thereby seriously limiting the scope of their application.
In recent years, globalization has spread to all regions of the world and to all sectors of the economy, including the manufacturing, service and commodity industries. The system implemented by the WTO has yielded positive results towards the opening of domestic markets by eliminating or reducing governmental barriers to trade and requiring non-discrimination with respect to foreign products. However, as countries liberalize and open up markets by dismantling government barriers to entry, these barriers have sometimes been replaced by less transparent private barriers, including anticompetitive practices by private actors.
There is also debate about whether domestic competition law enforcement is sufficiently vigorous to prevent anticompetitive conduct that restricts foreign competitors from entering a market. Although significant progress has been made by jurisdictions around the world to eliminate these private barriers to trade, investors are still seeking increased comfort when doing business abroad. Many developed and developing countries have incorporated strong domestic competition laws into their legal framework, but such competition rules still need to be supplemented by international avenues given that domestic rules often lack the necessary extra-territorial reach to counter anticompetitive practices at the global level.
While bilateral and regional agreements are becoming more frequent and more complex and have increasingly been incorporating competition-related provisions, some jurisdictions are still reluctant to commit to strong competition policy and significant disparities remain in enforcement processes. Ultimately, these issues undermine the benefits of free trade and can discourage foreign investors to do business abroad, which leads to a reduction of global welfare.
A broader agreement on competition policy within the WTO framework could help ensuring that investors doing business abroad enjoy the benefits of an objective and predictable competition policy regime that will protect them from anti-competitive practices in local markets.
While some competition-related co-operation agreements contain positive comity provisions that may commit jurisdictions to consider each other’s comity requests, countries remain free to make their law enforcement decisions as they choose. The use of positive comity by competition authorities therefore remains discretionary. As a result, despite the introduction of positive comity provisions in cooperation agreements, positive comity has only been used in a few cases and has provided for limited success.
While significant progress made in the recent years towards enhanced cooperation in competition matters and better integration of competition policy, including on defining anticompetitive conduct, and developing best enforcement practices, important barriers remain. Therefore, an eventual multilateral agreement on competition policy should at a minimum include core principles, procedural safeguards and cooperation mechanisms, including the adoption of a common definition of confidential information and of mechanisms to ensure its protection. More specifically, in order to achieve greater results towards the elimination of private barriers to trade, the agreement could include: an obligation to establish a competition law providing independence in investigation and adjudication; commitment to the core principles of competition policy,13 common substantive approaches to cartels, abuse of dominance and mergers; and mechanisms to facilitate and foster cooperation between competition authorities.
As for enforcement mechanisms, while proposals for voluntary cooperation and periodic peer reviews have been suggested, the risks that such non-binding mechanisms would lead to ineffective results cannot be discounted. While the proposal is ambitious and controversial, a perhaps better option would be to subject the agreement to the dispute settlement mechanism provided under the WTO framework. Although member states have always feared the possibility that such a mechanism would allow the review of decisions taken by national competition authorities,, safeguards could be put in place to ensure that a WTO agreement would not replace domestic laws and adjudicative bodies. To this effect, provisions modeling the European Union principle of subsidiarity, which provides that member states are responsible for competition policy unless it concerns practices that distort competition in the common market, could be contemplated.
3 The core principles include of transparency, non-discrimination and procedural fairness. The principle of transparency requires the parties to ensure that laws, regulations and guidelines are comprehensive and made available to the public; the principle of non-discrimination prohibits states from discriminating among foreign goods and services on the basis of nationality; and the principle of procedural fairness and due process implies minimum guarantees for parties facing adverse decisions and sanctions.
4 The TRIPS can be accessed at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm
5 The TRIMS can be accessed at http://www.wto.org/english/docs_e/legal_e/26-gats.pdf
6 The Canadian proposal: Options for the Internalization of Competition Policy: Defining Canadian Interests can be accessed at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/01745.html
7 Alvarez A. M., Clarke J. and Silva V., Lessons from the negotiation and enforcement of competition provisions in South-South and North-South RTAs, in Brusick, Alvarez, Cernat (eds), UNCTAD Competition Provisions in Regional Trade Agreements: How to Assure Development Gains , 2005.
8 The GATS can be accessed at http://www.wto.org/english/docs_e/legal_e/26-gats.pdf
9 The Antidumping Agreement can be accessed at http://www.wto.org/english/docs_e/legal_e/19-adp_01_e.htm
10 The Technical Barriers to Trade Agreement can be accessed at http://www.wto.org/english/docs_e/legal_e/17-tbt.pdf
11 The GATS Annex onTelecommunications can be accessed at http://www.wto.org/english/docs_e/legal_e/26-gats.pdf
12 Information relating to Dispute DS44: Japan — Measures Affecting Consumer Photographic Film and Paper can be accessed at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds44_e.htm
13 As indicated above, these principles include the principles of transparency, national treatment, non-discrimination and procedural fairness.